Dish’s Ad-Skip Tool May Benefit From Cablevision DVR Case

Announced in January, Dish’s Hopper service records the prime-time programs of the four major networks each night. Viewers can select which shows to watch beginning at 1 a.m. the next day and for eight days thereafter. Photographer: David Paul Morris/Bloomberg

June 5 (Bloomberg) -- The dispute over whether Dish Network
Corp.’s ad-skipping technology violates network television
copyrights may turn on which court the second-biggest U.S.
satellite-TV service persuades to hear the matter.

Dish is seeking court sanction on copyright grounds for its
Auto Hop digital video recording feature in New York, where an
appeals court has already said cable companies can offer remote
DVR services to customers. A jurisdictional win for Dish may
reduce the case to whether its contracts with the networks to
transmit their TV shows permit ad-skipping.

Widespread adoption of technology like Auto Hop could
compel advertisers to demand lower rates for easily skippable
commercials at a time when television viewership and ad revenue
are already declining. If enough viewers skip ads, the networks
warn, it might threaten broadcasters’ very existence.

“If there were no advertising revenues, the free broadcast
television model in the United States would collapse,” News
Corp.’s Fox Broadcasting said in the complaint it filed in Los
Angeles federal court. Also filing complaints were Comcast
Corp.’s NBC and CBS Corp. Dish sued those networks, along with
Walt Disney Co.’s ABC, in Manhattan federal court.

Both sides sued on May 24, according to court records. U.S.
District Judge Laura Taylor Swain in Manhattan issued an order
May 30 temporarily barring the networks from pursuing their
cases in Los Angeles and requesting arguments on whether the
disputes should be consolidated in New York. News Corp. and CBS
are based in New York, Disney in Burbank, California, and
Comcast in Philadelphia. Dish is based in Englewood, Colorado.

Hopper Service

Announced in January, Dish’s Hopper service records the
prime-time programs of the four major networks each night.
Viewers can select which shows to watch over the next eight days
beginning at 1 a.m. the following day. The Auto Hop feature lets
viewers choose to skip ads on the prerecorded shows without
fast-forwarding through them, as many DVRs require.

Dish has been advertising the service in print and online
as “commercial-free TV.”

Hopper costs customers $10 a month on top of their regular
subscription. Bob Toevs, a Dish spokesman, said the company
isn’t disclosing the number of consumers who have ordered the
service. Toevs referred questions about the company’s litigation
strategy to court filings.

In its complaint, Dish seeks a ruling that Auto Hop doesn’t
infringe copyrights or breach license agreements with the
broadcasters. Dish, which claims to have filed its lawsuit
first, says New York law governs its contracts with the
networks.

Cablevision Decision

The company may also have chosen New York because the
federal appeals court there ruled in August 2008 that
Cablevision Systems Corp. could provide its customers with DVRs
to record shows without authorization from the networks, Mitch
Stoltz, a staff attorney for the Electronic Frontier Foundation,
said in an interview. The EFF is an organization that lobbies
for free speech online.

“The ruling enables remote home taping under the control
of the customer without copyright violation,” said Stoltz.
“That’s the law in New York. The networks are trying to limit
that.”

In the Cablevision case, the networks said the Bethpage,
New York-based cable TV provider’s remote-storage DVR system
would make unauthorized copies of their programs without the
necessary license. The district court ruled in their favor, and
U.S. Court of Appeals for the Second Circuit, whose jurisdiction
includes New York federal courts, overturned that decision.

Playback Ruling

The judges on the appeals court said playback didn’t
constitute the transmission of a public performance of a work
for which a license would be necessary. That removes one
argument against ad-skipping playback -- namely, that it creates
an unauthorized copy of a copyrighted work.

Even if the dispute winds up in New York, the broadcasters
still have a chance to prove that Dish breached its contracts
with them. They say the contract that allows Dish to retransmit
their programs to subscribers prohibits the use of technology
that strips out the commercials.

“On copyright, the networks’ position is not so strong,”
Michael Meurer, a professor of intellectual-property law at
Boston University, said in an interview. “Whether Dish violated
the terms of its contract is more important.”

Lawyers including Meurer declined to speculate on Dish’s or
the networks’ chances of winning on the contract issue because
contract terms are confidential and haven’t been disclosed in
court papers.

‘Copyright Infringement’

“This service takes existing network content and modifies
it in a manner that is unauthorized and illegal,” CBS said in
an e-mailed statement sent by spokeswoman Shannon Jacobs. Scott
Grogin, a Fox spokesman, said, “We look forward to making our
case in court against Dish for copyright infringement and breach
of contract.”

“Dish simply does not have the authority to tamper with
the ads from broadcast replays on a wholesale basis for its own
economic and commercial advantage,” according to the statement.

Hope Hartman of ABC didn’t respond to messages seeking
comment on the litigation.

Dish has said the technology isn’t an attack on the current
television system. The company says it pays the networks
“hundreds of millions of dollars” a year in fees to retransmit
their broadcast signals to subscribers and that it’s entitled to
let customers watch the shows the way they want to.

‘Spending More’

“We are spending more on national advertising in 2012 than
we ever have,” Dish Chief Executive Officer Joseph Clayton said
last month. “In recent years, Dish has agreed to pay
significant rate increases for broadcast content. Dish values
its relationships with both local and national broadcasters. But
answering the consumer demand for choice and control is our
primary mission.”

There has been no major court ruling on ad-skipping
technology. In 2001, the broadcasters sued Sonicblue Inc., whose
ReplayTV DVR could skip ads. That case closed without a decision
after Sonicblue went bankrupt in 2003, in part due to legal
costs.

Litigation imposes a lighter financial burden on Dish, with
its 14 million subscribers and $14 billion in revenue last year,
an 11 percent increase from the year before.

Nielsen Research, in determining ratings for TV shows,
counts as viewers those who watch programs on their DVRs within
three days of the initial showing. Advertisers pay networks for
viewers who watch the ads, which can be measured.

Skip Ads

About 50 percent of people who watch recorded TV shows skip
through the ads, Brad Adgate, the senior vice president of
research for media services company Horizon Media, said in an
interview. About 44 percent of the households in the U.S. with
TVs have DVRs, he said. That’s up from 19 percent in 2007.

“Since 2007, ad-skipping has been part of the currency for
negotiating in TV,” Adgate said. He said commercial ratings are
typically 5 percent to 7 percent lower than the total television
viewing audience.

Network TV ad spending declined about 2 percent in 2011 to
$21.1 billion from $21.5 billion the year before, research firm
Kantar Media reported. The drop was caused by “the shrinkage in
number of viewers to network programs,” said Kantar’s Jon
Swallen.

If Dish’s new service causes revenue to decline further, it
might affect the companies’ ability to borrow money as well.
Auto Hop could have “broad negative credit implications across
the television industry,” Neil Begley, an analyst for Moody’s
Investors Service, said in a May 25 report.

More Cases

Besides the Auto Hop case, networks are involved in other
litigation over new technology that threatens to dilute the
value of their broadcasts to advertisers.

They sued New York-based Aereo Inc., which captures over-the-air TV signals and retransmits them to subscribers on the
Internet. A federal judge in New York, after a two-day trial
that ended May 30, will decide whether to shut down Aereo, which
is relying on the Cablevision ruling to bolster its case. The
networks said the transmissions are public performances, for
which Aereo hasn’t obtained a license.

Ivi Inc., which also captured broadcast signals and
streamed programming to subscribers over the Internet, was shut
down last year by a New York judge who said the networks were
“likely to succeed” on their copyright claims. Arguments in
Seattle-based Ivi’s appeal were heard before the 2nd Circuit May
30. Ivi claimed that it functions like a cable TV system and is
entitled to a retransmission license. The networks argued that
Ivi doesn’t fit the definition of a cable system.

Betamax Decision

The TV industry’s battles over new recording technology can
be traced back at least as far as the Sony Betamax case.
Producers sued Sony Corp. over its Betamax videocassette
recorders. Taping TV shows would lead to lower ratings and ad
revenues, the studios said. The U.S. Supreme Court ruled in 1984
that it wasn’t unlawful for consumers to copy a show for later
viewing, nor for companies to sell machines that make copies.

“Copyright law doesn’t require how people use content,”
said Boston University’s Meurer. “Copyright owners are in a
position to argue: We are going to see a significant decrease in
viewing commercials.”